PIR | Another Long Walk On A Short PIR

Takeaway:At $8 PIR is trading at 6.5x p/e, 0.4x sales, and 3.5x EBITDA on 2018 #s. We’re willing to stomach the near-term pain with numbers like that

If everyone wants to get bent out of shape on a 2% top line miss for a company that’s been struggling for the better part of 3-years, then they can be our guest. With a beaten-up value stock/show-me story like PIR, we need to see it go, in order, through the four critical stages of retail recovery. Those are 1) capex cut, 2) working capital improvement, after which we can begin to see 3) margin improvement, which will, in turn fuel 4) revenue growth. A company like this can’t go straight from “will it stay in business?” to “accelerated top line growth”. That’s simply not how the retail world works. The company’s capex will be down by 27% this year, we just saw a 16 percentage point positive swing in its sales to inventory spread (see SIGMA below), and that sets up for meaningful margin recovery in FY17 (which starts in four months). Along the way, we’re still seeing a comp of 2-3%, which ain’t half bad. We still think a year from now people will be looking at $1.25 as very realistic and achievable earnings power for PIR. That implies that at $8 the stock is trading at 6.5x earnings, 0.4x sales, and 3.5x EBITDA. We’re willing to stomach the near-term pain on this one with numbers like that. On the way back up, it’s not unrealistic at all to get to a stock well above $20 if our numbers are right.

More Details on the Quarter

A $0.03 miss in a seasonally weak quarter -- 180bps on the comp line, and merch margins down 380bps. As expected, new CFO Jeff Boyer took down this year’s EPS number by 30% to a range of $0.56-$0.64 as he more than took his lumps (and set beatable targets, we think) in his first call with the company.

But for a print as hairy as the one PIR reported tonight, we think the long term margin and earnings story is intact as earnings growth bottoms out at -62% and reaccelerates into positive territory in FY17. Over the past 2 quarters alone the company has had to stomach $22mm+ in added gross margin pressure (about 260bps) with more to come in 2H. That’s on top of the 500bps of margin that have evaporated over the past two years as PIR took its e-commerce business from 0% to 17%.

The sales to inventory spread improved by 16 percentage point from the first quarter and marked the best SIGMA reading we’ve seen since 3Q14. Inventory and store distribution will still be an issue for the balance of the year. But, the -10% inventory growth guidance (after the sequential change we saw this quarter) and the commentary surrounding the possibility of DC sq. ft. rationalization is bullish from where we sit.

09/24/15 09:21 AM EDT

PIR | LONG WALK ON A SHORT PIR

Takeaway: This is a great name to buy on an ugly print. Ugly qtr, but financial recovery finally within reach.

We’re not expecting a whole lot of positive news from PIR’s 2Q print (today after the close). EPS is a moving target, and guidance will be light. But when all is said and done we think that the results will show that the financial and operational inflection point for this beaten-down value stock is finally within reach. Are we concerned about a headline miss later today? Yes. We were well aware of these concerns when we added PIR to our Best Ideas list on August 31. Furthermore, we have yet to talk to anyone about this name that is not expecting an ugly quarter. Several analyst notes have already come out calling for a miss, and on top of that, short interest has raced up to 16% of the float – a four-year peak. We think they’ll ultimately be proved wrong.

A key consideration is that CFO Jeff Boyer will handle guidance for the first time after joining the company in late July. It’s not entirely clear how he will handle guidance…but we can’t imagine that he’ll want high targets his first year on the job. We’ve heard this concern from bears as well “new CFO will lower the bar”. Maybe we’d be concerned if the stock was up 20% over the past quarter, but we’re looking at quite the opposite – a 26% decline since the last earnings report in mid-June, and 12% over the past month. So will guidance be lower? Probably. But it’s very important to note that Boyer is likely to lower because he wants to, not out of necessity.

Why We Like It – PIR is a beaten-up, ugly value stock…there’s no two ways about it. But with the stock trading at just 0.5x sales – a level it hasn’t sustained in six years -- we think there are two primary questions to ask. 1) Are we going into a major recession? and 2) Is management going to do anything more destructive that would otherwise emulate a major recession? If you answer ‘No’ to both of those questions, then we think it’s a very good risk/reward to buy the stock with $3-$4 down and $20 upside.

Our Answers:

1) We have some major questions marks as it relates to the economy, but we’re not calling for an all-out recession.

2) This is a company that is no stranger to execution issues, but we don’t think that management is about to do anything more that would cause a downturn in the business (especially w/ new CFO taking the seat in late July). Quite the opposite, in fact. Consider this…

Over the past three years, PIR gave up 5 points of margin as it played catch-up with its e-commerce business, which stood at only 1% of sales in 2013. Today it is pushing 17%. E-comm will continue to be a headwind as it grows to the mid-30s (about 130bps of dilution over 4 years), but the combination of merch margin recovery and store base rationalization should more than offset the dilution. We think that ~300bps of the margin recoverable.

Interestingly enough, in our survey in this report, PIR’s categories ranked as the ones where consumers are most apt to switch sales online. If there is any company that should have invested in e-comm, it is PIR.

We’ve had three straight years of elevated capex as the company built out e-comm capabilities. That rolls off this year, with asset consolidation (closing stores) and multi-year margin tailwinds takes RNOA from trough levels at 19% in FY16E to 31% by 2020. That’s a long tail, but even the slightest sign that we’ve found the bottom should make this stock rally.

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